Is family office investment right for your startup?

This number is only increasing every day along with the interest of these ultra-high-net-worth-individuals (UHNWIs) and their families to invest in startups. The question is, are they the right investment vehicle for your startup? And if they are, how can you attract their investments?

The Asia Pacific alone had 814 billionaires at the end of 2017, with China minting 2 billionaires a week as reported by UBS and PwC in October 2018. As the wealth of these UHNWIs increases, they hire family offices to get personalised wealth management, investment and legal advice, and a host of other services.

In the US, they are at the forefront of startup funding rounds, many trumping VCs in the number and size of deals. According to PwC, China and other developed countries see up to 15% of family office holdings in startups, while in India, only 1% of their capital is invested in startups.

In the Middle East, there is a growing appetite for family offices to have direct investments in startups, as was discussed during the 8th Global Family Office Investment Summit held in Dubai, on 2-4 March 2019. Moreover, family offices in the region have historically been risk-averse, because of which they prefer to see a startup gain traction before they invest. That’s why one often sees family offices only invest in later stages. Although, they are able to sign larger cheques and have a host of other benefits.

Naturally, once you understand what family offices prefer and how they work, it is easier to plan your fundraising strategy accordingly. Following are some of the main factors that will help you determine whether investments from family offices is right for your company at any given point in time:

1. The best things about family office investments are that they’re long-term focused. With their large capital capacity, they are able to provide larger investments, without putting the pressure on startups to exit. Most of them are patient with their investments as they don’t have urgent liquidity needs, as compared to VCs who have time-bound contracts to return money to their own investors.

2. The large capital can help startups attract more experienced talent. They can also fill in roles outside the bare necessities that can support the business goals to be achieved quicker. For example, they can spend on multiple marketing activities more aggressively to grow their market share.

3. Family offices and UHNWI often prefer privacy and confidentiality. They do not appreciate too much publicity. That means your achievements of raising money and getting funded may not be as hyped as you’d like it to be.

4. Moreover, their preference for private dealings means they aren’t very well known in the market compared to VCs. So, even though you might have a great supportive family office backing your startup, chances are you may not enjoy the benefits that generally come with a VC’s stamp of approval.

5. Family offices in the region often serve multiple generations of UHNWI within the same family. Exercising your diplomacy skills to keep everyone on board happy is highly important, especially when the family office is not as organised as in the US.

6. Family offices issue large cheques and have great connections to help you with a range of services. In turn for these, they expect and often wield greater control over business decisions of the startup. While those who work in the same field as your startup can offer invaluable advice, as the founder you need to be comfortable with them holding part of the reigns.

Once you’ve understood and are on board with all the advantages and challenges that will be coming your way with direct investments from family offices, you can go ahead and carefully research, plan and target these offices. Following are some pointers:

1. Start off with research into family offices in the region. Look at the ones who have a track record of startup investments, map the sectors they have investments and businesses in, learn about the UHNWIs behind the family office, and try speaking to people to get some insights into their activities and interests.

2. Targeting those who come from and operate in the same sector as your startups could make it easier to convey your idea and bag the investment, as well as gain valuable insights, business advice and industry connections from these UHNWIs.

3. Family offices are patient and slow action takers, and you need to incorporate those aspects in your approach strategy. The right connection, reference or introduction can make all the difference in gaining their attention and interest. These people do business based on trust, and it’s more about who connected you with them than what your startup is about. So, take the time to find the right connection.

4. Investments from family offices can take a long time. It’s best to build your connections slowly with the office members and foster trust and like-ability. They are the key to convincing the UHNWIs to make the investment.

Family offices may not be as publicised as VCs, but they do have many other competitive advantages that may be better for startups who have long-term business strategies, need capital to gain a larger market share quickly, don't wish to exit soon or deal with the pressure of short term gains. The right investor can make a world of difference to help you achieve your goals and take your startup to new heights. So, do put in some extra time in researching them and carefully planning out your strategy.